Share on Google Plus Share on Twitter Share on Facebook 4 Share on LinkedIn Share on PInterest Share on Fark! Share on Reddit Share on StumbleUpon Tell A Friend 1 (5 Shares)  
Printer Friendly Page Save As Favorite View Favorites View Stats   40 comments

OpEdNews Op Eds

The Libor Scandal In Full Perspective

By (about the author)     Permalink       (Page 1 of 3 pages)
Related Topic(s): ; ; ; ; ; ; ; ; ; , Add Tags Add to My Group(s)

Must Read 6   Well Said 4   News 4  
View Ratings | Rate It Headlined to H1 7/19/12

Become a Fan
  (384 fans)
Cross-posted from Paul Craig Roberts

The article about the Libor scandal, co-authored with Nomi Prins, received much attention, with Internet repostings, foreign translation, and video interviews. To further clarify the situation, this article brings to the forefront implications that might not be obvious to those without insider experience and knowledge.

The price of Treasury bonds is supported by the Federal Reserve's large purchases. The Federal Reserve's purchases are often misread as demand arising from a "flight to quality" due to concern about the EU sovereign debt problem and possible failure of the euro.

Another rationale used to explain the demand for Treasuries despite their negative yield is the "flight to safety." A 2% yield on a Treasury bond is less of a negative interest rate than the yield of a few basis points on a bank CD, and the US government, unlike banks, can use its central bank to print the money to pay off its debts.

It is possible that some investors purchase Treasuries for these reasons. However, the "safety" and "flight to quality" explanations could not exist if interest rates were rising or were expected to rise. The Federal Reserve prevents the rise in interest rates and decline in bond prices, which normally result from continually issuing new debt in enormous quantities at negative interest rates, by announcing that it has a low interest-rate policy and will purchase bonds to keep bond prices high. Without this Fed policy, there could be no flight to safety or quality.

It is the prospect of ever lower interest rates that causes investors to purchase bonds that do not pay a real rate of interest. Bond purchasers make up for the negative interest rate by the rise in price in the bonds caused by the next round of low interest rates. As the Federal Reserve and the banks drive down the interest rate, the issued bonds rise in value, and their purchasers enjoy capital gains.

As the Federal Reserve and the Bank of England are themselves fixing interest rates at historic lows in order to mask the insolvency of their respective banking systems, they naturally do not object that the banks themselves contribute to the success of this policy by fixing the Libor rate and by selling massive amounts of interest rate swaps, a way of shorting interest rates and driving them down or preventing them from rising.

The lower is Libor, the higher is the price or evaluations of floating-rate debt instruments, such as CDOs, and thus the stronger the banks' balance sheets appear.

Does this mean that the US and UK financial systems can only be kept afloat by fraud that harms purchasers of interest rate swaps, which include municipalities advised by sellers of interest rate swaps, and those with saving accounts?

The answer is yes, but the Libor scandal is only a small part of the interest rate rigging scandal. The Federal Reserve itself has been rigging interest rates. How else could debt issued in profusion be bearing negative interest rates?

As villainous as they might be, Barclays bank chief executive Bob Diamond, Jamie Dimon of JP Morgan, and Lloyd Blankfein of Goldman Sachs are not the main villains. The main villains are former Treasury Secretary and Goldman Sachs chairman Robert Rubin, who pushed Congress for the repeal of the Glass-Steagall Act, and the sponsors of the Gramm-Leach-Bliley bill, which repealed the Glass-Steagall Act. Glass-Steagall was put in place in 1933 in order to prevent the kind of financial excesses that produced the current ongoing financial crisis.

President Clinton's Treasury Secretary, Robert Rubin, presented the removal of all constraints on financial chicanery as "financial modernization." Taking restraints off of banks was part of the hubristic response to "the end of history." Capitalism had won the struggle with socialism and communism. Vindicated capitalism no longer needed its concessions to social welfare and regulation that capitalism used in order to compete with socialism.

The constraints on capitalism could now be thrown off, because markets were self-regulating as Federal Reserve chairman Alan Greenspan, among many, declared. It was financial de-regulation -- the repeal of Glass-Steagall, the removal of limits on debt leverage, the absence of regulation of OTC derivatives, the removal of limits on speculative positions in future markets -- that caused the ongoing financial crisis. No doubt but that JP Morgan, Goldman Sachs and others were after maximum profits by hook or crook, but their opportunity came from the neoconservative triumphalism of "democratic capitalism's" historical victory over alternative socio-politico-economic systems.

The ongoing crisis cannot be addressed without restoring the laws and regulations that were repealed and discarded. But putting Humpty-Dumpty back together again is an enormous task full of its own perils.

The financial concentration that deregulation fostered has left us with broken financial institutions that are too big to fail. To understand the fullness of the problem, consider the lawsuits that are expected to be filed against the banks that fixed the Libor rate by those who were harmed by the fraud. Some are saying that, as the fraud was known by the central banks and not reported, the Federal Reserve and the Bank of England should be indicted for their participation in the fraud.

What follows is not an apology for fraud. It merely describes consequences of holding those responsible accountable.

Next Page  1  |  2  |  3

Dr. Roberts was Assistant Secretary of the US Treasury for Economic Policy in the Reagan Administration. He was associate editor and columnist with the Wall Street Journal, columnist for Business Week and the Scripps Howard News Service. He is a contributing editor to Gerald Celente's Trends Journal. He has had numerous university appointments. His book, The Failure of Laissez Faire Capitalism and Economic Dissolution of the West is available here. His latest book,  How America Was Lost, has just been released and can be ordered here.

Share on Google Plus Submit to Twitter Add this Page to Facebook! Share on LinkedIn Pin It! Add this Page to Fark! Submit to Reddit Submit to Stumble Upon

Go To Commenting

The views expressed in this article are the sole responsibility of the author and do not necessarily reflect those of this website or its editors.

Writers Guidelines

Contact Author Contact Editor View Authors' Articles

Most Popular Articles by this Author:     (View All Most Popular Articles by this Author)

Libya - The DC/NATO Agenda And The Next Great War

The Road to Armageddon

American Job Loss Is Permanent

A Story...The Last Whistleblower

Pakistan TV Report Contradicts US Claim of Bin Laden's Death


The time limit for entering new comments on this article has expired.

This limit can be removed. Our paid membership program is designed to give you many benefits, such as removing this time limit. To learn more, please click here.

Comments: Expand   Shrink   Hide  
16 people are discussing this page, with 40 comments
To view all comments:
Expand Comments
(Or you can set your preferences to show all comments, always)

To give credit where credit is due, Paul Craig Rob... by E. J. N. on Thursday, Jul 19, 2012 at 3:57:20 PM
Robert Reich was a big supporter of NAFTA and cont... by Chris Cook on Thursday, Jul 19, 2012 at 4:30:30 PM
Well, it's true that Reich is not against free tra... by E. J. N. on Thursday, Jul 19, 2012 at 5:35:01 PM
The fact that Stephen Lendman has Paul Craig Rober... by Chris Cook on Thursday, Jul 19, 2012 at 6:15:49 PM
Don't get me wrong, I think both do good work, for... by E. J. N. on Thursday, Jul 19, 2012 at 6:40:03 PM
models with double back bending supply and demand ... by bogi666 on Friday, Jul 20, 2012 at 7:25:38 AM
The correct title for Springsteen's song is "Born ... by bogi666 on Saturday, Jul 21, 2012 at 7:53:37 AM
The brainwashed left blames Reagan for events that... by Paul Craig Roberts on Thursday, Jul 19, 2012 at 4:51:45 PM
as a Saint is plain wrong.  (It is nice to se... by Lester Shepherd on Thursday, Jul 19, 2012 at 5:09:10 PM
More rudeness from the brainwashed ignorant.  ... by Paul Craig Roberts on Thursday, Jul 19, 2012 at 5:10:29 PM
mole.  I do not know how you fooled Ms Prins.... by Lester Shepherd on Thursday, Jul 19, 2012 at 6:51:58 PM
Don't let the door hit you in the ass when you lea... by bogi666 on Friday, Jul 20, 2012 at 8:02:04 AM
Bill <spit on the ground> clinton (sic) was ... by Tom Madison on Thursday, Jul 19, 2012 at 5:53:30 PM
"Federal government spending was 25 percent higher... by E. J. N. on Thursday, Jul 19, 2012 at 6:28:58 PM
So here we have a lefty damning Reagan for spendin... by Paul Craig Roberts on Thursday, Jul 19, 2012 at 8:43:34 PM
Paul Craig Roberts claims that it is the "ultimate... by E. J. N. on Thursday, Jul 19, 2012 at 9:53:41 PM
is a narcissistic mole I tell ya.In the first plac... by Lester Shepherd on Thursday, Jul 19, 2012 at 10:50:36 PM
"Why do people such as EJNunn who have no idea wha... by Walter J Smith on Friday, Jul 20, 2012 at 11:56:40 PM
Walter,You imply that I don't acknowledge that&nbs... by E. J. N. on Saturday, Jul 21, 2012 at 1:02:01 AM
As you say, Clinton did sign the repeal of Glass-S... by E. J. N. on Thursday, Jul 19, 2012 at 6:03:54 PM
You have no idea what you are talking about. There... by Paul Craig Roberts on Thursday, Jul 19, 2012 at 8:46:21 PM
So you still claim that Republicans Phil Gramm, Ji... by E. J. N. on Thursday, Jul 19, 2012 at 10:07:47 PM
I don't know much about all the politics or econom... by Ernie Messerschmidt on Thursday, Jul 19, 2012 at 10:46:13 PM
Blue Dog Democrats are Reaganites, Dumbo.... by Lester Shepherd on Friday, Jul 20, 2012 at 6:27:47 AM
As for the Democrat blue dogs, they just back Repu... by bogi666 on Friday, Jul 20, 2012 at 8:08:17 AM
He didn't "win" the cold war. I had more to do the... by bogi666 on Friday, Jul 20, 2012 at 7:59:50 AM
It's remarkable how much common ground there is be... by Josh Mitteldorf on Friday, Jul 20, 2012 at 6:38:57 AM
The Big Lie has indeed taken over partisan politic... by E. J. N. on Friday, Jul 20, 2012 at 2:47:21 PM
Quite a long time ago I wrote: A Penny Saved is a... by Phil Linehan on Thursday, Jul 19, 2012 at 6:27:01 PM
I wrote this some years ago: A Penny Saved is a P... by Phil Linehan on Thursday, Jul 19, 2012 at 6:31:14 PM
is my political-economic program. Political decent... by Ethan Hollow on Thursday, Jul 19, 2012 at 11:19:07 PM
Posted the week of April 12, 1998 Unde... by Alain Lareau on Thursday, Jul 19, 2012 at 11:48:30 PM
You have set forth quite a curriculum Mr. Lareau. ... by Elizabeth Hanson on Friday, Jul 20, 2012 at 6:33:35 AM
Nathan Rothschild at  the London Stock Exch... by Lance Ciepiela on Friday, Jul 20, 2012 at 10:08:31 AM
"The financial concentration that deregulation fos... by Walter J Smith on Friday, Jul 20, 2012 at 11:46:34 PM
Walter wrote: "The amazing puzzle is why so few of... by E. J. N. on Saturday, Jul 21, 2012 at 3:11:09 PM
Yes, there are all kinds of people crying for free... by Burl Hall on Sunday, Jul 22, 2012 at 4:17:28 AM
I don't think people "escaped from freedom." ... by E. J. N. on Sunday, Jul 22, 2012 at 8:23:11 PM
The hierarchy of head-higher-than-heart is m... by Theresa Paulfranz on Monday, Jul 23, 2012 at 12:39:42 PM
I should preface this by saying that Paul Craig Ro... by E. J. N. on Saturday, Jul 21, 2012 at 3:02:06 PM